Rising interest rates, commodity crashes and fear of inflation could spell a disaster for the Aussie economy but everything might not be quite as it seems.
Last week Australia witnessed a historic breaking of the Reserve Bank of Australia by markets. At the start of the week, the RBA was insisting that it would not lift interest rates before 2024. By Friday, it had capitulated to bond market pricing that it would hike rates five times in the next year.
The first was building global inflation panic around supply-side constraints in the global economy arising from Covid distortions.
The second was a firm local inflation print that pushed the core consumer price index (CPI) within the RBA’s 2 to 3 per cent band for the first time in six years.
This was enough for the traditionally labelled “bond vigilantes” to storm markets and force a bowel-shaking repricing of Australian interest rates.
Global inflation is being driven by a range of unsustainable factors more related to economic reopening than by sustained economic expansion.
Supply-side inflation emanating from pumped-up American goods consumption will ease over the next year as services spending rebounds with an easing pandemic. Chinese export capacity constraints will likely collapse as American goods demand eases.
